P0007 Purpose Code
According to the RBI, it is for transactions related to “Foreign direct investment in India in debt securities.”
P0007 is used when money is sent from outside India as Foreign Direct Investment (FDI) in the debt securities of an Indian company. This means a foreign investor, which could be an individual or a company, lends money to an Indian company by purchasing its debt instruments like non-convertible debentures (NCDs) or bonds, instead of buying shares. The Indian company agrees to pay back the money with interest over time. This code is used during the transfer to show that the funds are for investment in debt, not equity.
For example, A firm based in the United Kingdom invests Rs. 50 crore in an Indian infrastructure company by purchasing its non-convertible debentures (NCDs). This is a foreign direct investment in debt, so the money is sent using Purpose Code P0007. The Indian company agrees to repay the amount with interest and uses the funds for expansion, while the UK firm earns interest on its investment.
What Are The Types of Debt Securities in which An Investor Can Invest?
- Non-Convertible Debentures (NCDs) – These are a type of loan taken by Indian companies from investors. When someone invests in NCDs, they are lending money to the company for a fixed period. In return, the company pays a fixed interest regularly. Unlike shares, NCDs do not give ownership in the company and cannot be converted into shares later. They are simply a way for companies to raise money and for investors to earn interest income.
- Bonds – Bonds are a way for Indian companies to borrow money from investors. These can be of two types: listed on the stock market or not listed. The company promises to return the money after a certain time with interest. These bonds can be in Indian Rupees or foreign currency, but only as allowed by RBI rules.
- Compulsorily Convertible Debentures (CCDs) – CCDs are like loans at first, but they must turn into company shares after a set time. So, when the money first comes in, it is treated like a loan and reported under Purpose Code P0007. Later, when the CCDs change into shares, they become an equity investment and are reported under Purpose Code P0006.
- External Commercial Borrowings (ECBs) – Here are some of the most commonly used ECBs:
– Plain ECB (Loan Agreement) – A Plain ECB is a simple loan taken by an Indian company from a foreign bank or financial institution. It must be repaid with interest over a fixed period.
– Foreign Currency Convertible Bonds (FCCBs) – These bonds, given in foreign currency, act like loans initially, where the company pays interest to the investor. However, they come with an option for the investor to convert the bonds into equity shares of the company at a later date, usually at a pre-agreed price. This makes FCCBs a mix of debt and equity, offering both fixed income and potential ownership in the company.
– Foreign Currency Exchangeable Bonds (FCEBs) – FCEBs are bonds issued by an Indian company in foreign currency, where the investor can exchange them for shares of another group company, not the issuer. They are used to raise foreign capital within business groups.
– Masala Bonds – These are rupee-denominated bonds issued by Indian companies to raise funds from foreign investors. The exchange rate risk is borne by the investor, as repayments are made in rupees. This allows Indian companies to access global funds without facing currency risk.
– Bank Loans or Buyers’ Credit / Suppliers’ Credit – It refers to funds borrowed from foreign banks or credit extended by overseas suppliers to Indian businesses. In these cases, an Indian company either takes a loan directly from a foreign bank or gets credit from a foreign supplier for purchasing goods or services, which is to be paid later.
– Securitised Instruments – These are financial products created by pooling various types of assets, like loans or mortgages, and converting them into marketable securities. Examples include mortgage-backed securities (MBS) and asset-backed securities (ABS). These are usually issued abroad and represent claims on the underlying asset pool. When foreign investors invest in such instruments linked to Indian assets or issued by Indian entities overseas, it falls under specialised categories and may require separate RBI approval.
Important Rules for Investing
- Investment Must Be Lawful – This means that the investor should follow the guidelines mentioned under the Foreign Exchange Management Act (FEMA), laid down by the RBI.
- Use of Proper Banking Channels – Foreign investors must transfer funds through proper banking channels, using international systems like SWIFT. The remittance must go through an Authorised Dealer (AD) bank in India to ensure transparency and compliance with RBI and FEMA rules.
- Who Reports the Transactions? – Purpose Code P0007 is utilised by both the foreign investor and the Indian company receiving the investment. The foreign investor uses this code when remitting funds to India to ensure that the remittance is correctly classified as foreign direct investment (FDI) in equity. This is done through the bank handling the transfer, usually the remitting bank abroad and the Authorised Dealer (AD) bank in India. However, the primary responsibility for reporting the FDI to the Reserve Bank of India (RBI) lies with the Indian company receiving the funds for investment.
- Time Limit – As per the RBI and FEMA, no time limit has been prescribed for investors to report the capital they would use for investment purposes. However, the Indian company receiving funds must report the transaction by submitting Form ECB to its Authorised Dealer (AD) bank within 30 days from the date of the first disbursement.
- Applying for the Loan Registration Number (LRN) – LRN plays a vital role in processing the formalisation of receiving the funds. After the bank accepts Form ECB filled by the company, it sends the form to the RBI to get the LRN, following which the company must file a Monthly ECB Return (Form ECB-2) with loan and repayment details, within 7 days (excluding Saturdays, Sundays, and declared public holidays) of each month’s end.
How to Report the Purpose of The Transaction to The RBI by Giving the Purpose Code:
Investors investing money in India must file several forms before starting the process. Usually, the transactions are via bank transfers, and your bank will ask you to provide a purpose code by giving a form to fill out. If you have any doubts or questions, feel free to reach out to us via email- support@bankerpanda.com, and we will try our best to help you out.
Tax or No Tax?
There is no tax in India on the capital amount sent by a foreign company or individual investor for investment in an Indian company under Purpose Code P0007 (FDI in equity shares). This is because the remitted amount is treated as capital, not income, and is therefore not taxable under Indian income tax laws at the time of investment. While the Indian company receiving the funds must comply with FEMA and RBI regulations, such as reporting the transaction and issuing shares within prescribed timelines, no tax is levied on the capital amount received through FDI. Important exemption laws under DTAA and Liberalised Remittance Scheme (LRS) are also not applicable in this case.
Note: An investor (including a foreign investor or foreign company) who invests in an Indian company does not receive any profit directly from the Indian government but only from the company in which the investment was made.
P0007 Purpose Code Use Case Examples:
Here are some real-life examples where the RBI’s Purpose Code P0007 would be used to report transactions in India:-
- External Commercial Borrowing (ECB) Loan from a Foreign Parent Company:-
An Indian branch of a global company gets a $10 million loan from its parent company in the USA. This loan is treated as an External Commercial Borrowing (ECB) to help build a new factory in India. The money is sent through the company’s Authorised Dealer (AD) bank in India and is reported using Purpose Code P0007. The Indian company submits Form ECB within 30 days to get a Loan Registration Number (LRN) from the RBI. After that, it files monthly ECB-2 reports to share updates like how much of the loan is used or repaid.
- Foreign Investment in Rupee-Denominated Bonds:-
A foreign portfolio investor (FPI) based in Singapore invests 50 crore in rupee-denominated bonds, also known as Masala Bonds, issued by an Indian infrastructure company. The company raises these funds to finance its road development projects in India. The investment is made in Indian rupees, and the money is received through an Authorised Dealer (AD) bank. This inward remittance is reported under Purpose Code P0007, which is used for foreign direct investment in India in debt securities.
- ECB for Working Capital Needs:-
An Indian IT services company borrows 5 million Euros from a German lender to cover its short-term working capital needs, like paying salaries or bills. This type of borrowing is treated as an External Commercial Borrowing (ECB) and is reported under Purpose Code P0007.
- Investment Through Fully Convertible Debentures (FCDs):-
A private equity firm in Hong Kong invests $15 million in an Indian tech startup by subscribing to Fully Convertible Debentures (FCDs). Since these are treated as debt until converted into equity, the initial remittance is reported under P0007. Upon conversion into equity later, future reporting may fall under P0006.
- Repeat ECB Investment:-
A US-based investor, having earlier lent $10 million to an Indian manufacturing company, agrees to provide an additional $3 million as working capital. This second slot of investment is also reported under P0007, and both investments are monitored under the same Loan Registration Number (LRN).
A content writer, editor, and proofreader with over three years of experience in producing well-researched, user-friendly content that simplifies complex information for readers, helping brands to enhance their online presence.
